How VCs can do more good

Venture capital does many great things for the United States. Importantly, it fuels the innovation economy, churning out disruptive products, companies and entire new industries. Indeed, venture is extreme capitalism. Creative destruction rolls over incumbents, and society is usually better off as a result.

But a good society requires more than just a robust economy — it also demands fairness and morality. While technology innovations can benefit everyone, the venture economy concentrates the direct financial benefits among very few people.

Silicon Valley has a perception problem enabled by venture. Tech already suffers self-inflicted wounds around inequality and its well-noted lack of diversity. If we don’t do more, we will have a future where venture capital is mentioned in the same breath as Wall Street — a perceived social ill that requires aggressive political intervention. Venture investors are well-positioned to do more, and more good.

So what should a VC do?

We want to stimulate the conversation about some of the ways venture can do more to make the world a better place. If nothing else, we want to highlight some ways individuals can do their part.

Support entrepreneurs outside of the elite venture system — empathy, not sympathy

A natural step is to support entrepreneurs outside the venture ecosystem. Venture investors can be strong mentors to anyone building a business.

Defy Ventures is the type of organization that makes this happen. Defy’s volunteers work with prisoners, both incarcerated and recently released, to help them build small businesses of their own. It works. Prisoners are building companies like Prison Bars. The recidivism rate of participants is less than 3 percent. We volunteer with the organization as business pitch judges and mentors.

Pacific Community Ventures is a similar organization working with small local businesses. Experienced business people volunteer to mentor and support local business entrepreneurs in their community. Around San Francisco, this includes local businesses we know and love, like 4505 Meats, Taylor Stitch, Flora Grubb Gardens and well over 100 more. Pacific Community Ventures also supports small business loans.

Diversity makes venture better

Diversity is about much more than appearances or even just trying to do the right thing. It’s about selfish motivations, too. Diverse teams make better decisions, as has been shown time and again by research. And they are good for reasons similar to holding a diversification of different types of investments — diverse teams are more robust and resilient, and when new challenges arise, teams with different voices and perspectives are better equipped to handle them.

If we don’t do more, we will have a future where venture capital is mentioned in the same breath as Wall Street — a perceived social ill that requires aggressive political intervention.

Tech and venture have dismal track records of diversity. The good news is that there is broad interest in improving the situation. Investors should play their role in making this happen.

Firm leaders need to first bring investing partner-level diversity into their funds. The top priority is recruiting and developing the next generation. A glimmer of light in the system is that some of the newer firms have greater racial and gender diversity, but it’s far from ideal. The larger, established funds have even further to go. More needs to be done at all levels.

Investors should also recruit diversity into portfolio company leadership. Top hires often come through investor referrals or with investor support in closing the candidate. Investors can drive different types of individuals into the process and leadership ranks.

Align philanthropy with impact

Philanthropy can be aligned with greater impact if VCs focus on what they are good at. Encouraging companies to give their product to nonprofit organizations brings needed technology to their efforts, and leverages our strengths in Silicon Valley. Spending time on efforts where you have expertise, like supporting entrepreneurship amongst disadvantages populations, ensures we will have far more impact than in areas we are less well-versed. The old adage rings true: Play to your strengths.

A direct giving program is very easy to put in place. Marc Benioff sets a wonderful example with his Pledge 1% — a commitment to give 1 percent of equity, 1 percent of time and 1 percent of product to philanthropy. It’s modest, yet meaningful. More venture firms should join the esteemed list that includes the likes of Bessemer, Foundry, Greylock and SV Angel. Firms should encourage portfolio companies to take part too.

Funds can uniquely support philanthropy by expressing favor for philanthropic limited partners. There are many, including philanthropic foundations, interested in venture investing. And there are organizations like Legacy Ventures, which creates a channel for philanthropic investing through funds. The strongest performing funds have their pick of limited partners and should give preference to those whose money goes back toward the common good.

Encourage portfolio companies’ social missions

Benefit Corporations (“B Corps”) could be used at more startups. Investors should support them. B Corps have a fiduciary duty to generate profits for their stakeholders, but this may also have an accompanying social mission. There is no tax risk for a fund’s LPs either. The IRS taxes B Corps just like any other corporation. Investors can also lean on their existing tools. Having even five minutes spent at board meetings to discuss the company’s social commitment will keep it in focus. Investors can leverage their large networks to make introductions and help founders carry out this aspect of their business.

This is by no means a comprehensive list, but rather a starting point. Venture forth — and do good.